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If you haven’t done so recently, now is a good time to review your company’s use of background checks and credit reports. The increasing number of class actions and high-dollar settlements highlight the risks employers face when obtaining background checks or credit reports on current and potential employees. Failure to comply with the federal Fair Credit Reporting Act’s (FCRA) strict technical requirements pertaining to the use of “consumer reports,” which includes background checks and credit reports, has cost employers hundreds of thousands – even millions – of dollars in class action litigation and settlement agreements.

For example, Whole Foods, in a settlement that is small in comparison to other recent FCRA class action settlements, paid over $800,000 to settle a class action involving 20,000 class members. Chuck E. Cheese paid $1.75 million, the parent company for the grocery store Food Lion paid almost $3 million, Home Depot paid $3 million, Dollar General paid approximately $4 million, and Publix Super Markets paid $6.8 million.

Companies may be inclined to settle when facing statutory damages ranging from $100 to $1,000 per violation and class members of 20,000 or more, because there is no cap on the recovery of statutory damages under the FCRA. Plaintiffs also can recover attorneys’ fees and costs plus punitive damages. For example, although Whole Foods paid $800,000 to settle, it could have faced between $2 million to $20 million in damages.

These settlements represent only a fraction of the recently-filed FCRA class actions. In 2015, class actions were filed against companies such as Chipotle, Michael’s, Dollar Tree, Big Lots, Avis, Amazon, Pizza Hut, and Universal Studios.

These class action suits allege very technical violations of the FCRA’s requirements. Examples of violations that have led to lawsuits include:

Failure to provide a standalone disclosure. The FCRA requires that applicants or employees receive a “clear and conspicuous” written disclosure informing them that a consumer report may be obtained for employment purposes and they must provide written consent before the employer may obtain a consumer report. The disclosure must be in a “standalone” document – that is, the document consists solely of the disclosure. The disclosure cannot include other information, such as a liability release, and cannot be buried in the middle of an employment application or other pre-employment documents.

Failure to provide required information to applicants or employees before taking an adverse action based on a consumer report. Employers must provide a copy of the report and a written “summary of rights” to an individual before taking an adverse action, such as refusal to hire, termination, or other similar negative employment action. Employers also must provide the individual a reasonable time to respond or to dispute the report before taking an adverse action.

Failure to provide additional detailed information to an applicant or employee after taking an adverse action. This includes notice of the adverse action based on the consumer report, specific information related to the consumer reporting agency that provided the report, and notice of the consumer’s rights to obtain a copy of the report within 60 days and to dispute the information in the report.

To minimize risk, ensure that your company’s background check and credit report process, including all relevant forms, complies with the FCRA’s requirements, including those outlined above. In addition, ensure that background checks and credit reports are used only when permissible under applicable state and local law. Finally, ensure that your application complies with applicable state and local “ban the box” laws—laws that prohibit employers from asking job applicants questions about criminal history on a job application (see our prior posts here and here).

Compare jurisdictions: Employment & Labor: International

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